VW seeks future-proof components arm

Thomas Schmall, head of VW Group Components, is methodically restructuring the company’s $38.5 billion parts business, now at the epicenter of the automaker’s massive shift to electrified cars.

An example of this is the battery-powered Volkswagen ID3, which will be on the road next summer. While the Golf-size car still requires a lot of conventional components — seats, doors and wheels on each axle — its powertrain is vastly different.

For Volkswagen to produce it, Schmall’s components division has had to adjust, starting with VW’s powertrain factory in Salzgitter, Germany.

The plant underwent an initial metamorphosis, incorporating electric components on its line and starting a pilot for small-series battery cell production.

The next major step will be the addition of a 16-gigawatt-hour battery cell factory in Salzgitter. The joint-venture plant with Northvolt is set to open as early as 2023.

“The biggest transformation we will see will be at Salzgitter, and I believe it will serve as an example for the entire German auto industry,” he told Automotive News Europe.

He cited three major challenges facing his company: “We must keep our engines viable by making them Euro 7-compliant,” he said, referring to meeting new European market regulations that demand dramatically lower carbon dioxide emissions.

VW must also “adjust production capacity in Europe due to the shift away from diesel to gasoline,” he added, “and ramp up production of electric drivetrains.”

VW Group Components was formed in January after a carve-out process that took more than three years to complete. It now incorporates nearly 80,000 employees across 47 global locations building everything from driveshafts and dampers to front axles and steering columns.

Traditionally, the parts arm’s main task was manufacturing more than 10 million combustion engines and transmissions a year. But as VW shifts to electric powertrains, that volume will have to be completely wound down by around 2040 — without causing a sustained hit to earnings.

According to sources, VW Group Components earns, on average, an operating margin of 4 to 5 percent, depending on the product. A tenth of its work force is slated to be eliminated in the next four years to protect that profitability. But a labor pact in Germany means layoffs at its high-wage sites in the country are not an option through the next decade.

Schmall declined to confirm VW Group Components’ margin but said his aim remains to achieve the strategic target margin set by his bosses: 6 percent.

While he predicted suppliers making the shift to EVs would find it difficult to boost returns to more than 10 percent, he said VW could rely on growing volumes to help it through the transition.

“By 2025, our site in Kassel plans to manufacture up to 1 million electric drivetrains, making us one of the largest suppliers in the market. With those kinds of volumes, you shape the global competitive landscape,” Schmall said.

The VW manager plans to invest about $3.96 billion through 2023 in the business’s EV component operations, but that means funds will be limited elsewhere. To address that challenge, he made a deal to combine VW’s conventional steering business with Japan’s NSK to share costs. This will allow the operation to focus on the steer-by-wire technology needed to address another megatrend: the move toward self-driving cars.

Schmall aims to use the NSK deal as a blueprint to put VW Group Components’ seating unit, Sitech, on more stable footing. He sees a chance for the subsidiary to expand its operations to eventually include products for autonomous cars, where occupants may not be in the conventional forward-facing position when a crash occurs. That new reality creates new opportunities for specialized seating solutions.

“It sounds simple — just some upholstery, really — but a car seat is actually a complex product,” Schmall said. “We are currently sifting through the market in search of a partner for Sitech that can help us acquire the necessary know-how.”

To compensate for the loss from activities no longer competitive enough to meet his profit target, Schmall is looking to add new revenue streams. Possibilities include revenue from the sale of mobile energy storage units, as well as recycling the raw materials of spent battery cells.

While half of VW’s drivetrains will still be gasoline or diesel in 2030, the components chief said the top priority from his viewpoint at ground zero of VW’s transformation is ensuring the parts business is future proof: “Every cent I invest today in electric mobility, as opposed to combustion technology, is preferable.”